Washington cannabis purveyors say they are getting burned by tax laws

A one-gram packet of a variety of marijuana named “Space Needle” made by Sea of Green Farms in Seattle. Each packet is labeled with the percentage of THC, a lot number, and warning messages. (AP Photo/Ted S. Warren)

Washington state’s high taxes on cannabis, coupled with a provision in the U.S. tax code that enables the IRS to tax marijuana-related businesses on excise taxes paid to the state, is making it tough to keep a business afloat, according to Bill Lucia at Crosscut.com.

Cannabis City was the first recreational marijuana retailer to open in Seattle. The shop recorded just over $2.5 million in total sales between early July and the beginning of December, according to Washington State Liquor Control Board records.

While that might sound like a healthy amount of revenue for a new retail business with a single storefront location, the company’s owner says that a potent mix of state and federal tax obligations is straining the shop’s finances.

“We’re just struggling to stay alive,” says James Lathrop, the owner.

There is a single chief concern shared by many people currently involved in Washington’s recreational marijuana industry: The 25 percent excise tax that the state levies on pot at each step in the supply chain — as it moves from growers, to processors, to retailers — cannot be written off when businesses file their federal taxes. This is because of a provision in the U.S. tax code, known as “280E,” which prohibits businesses from claiming any tax deductions if they are trafficking drugs the federal government considers illegal.

“If you’re in this industry and you don’t know about 280E, you’re screwed,” said Todd Arkley, an accountant, who owns Arkley Accounting Group, a Seattle-based firm that provides bookkeeping and financial management services for marijuana-related businesses. “If companies are not setting money aside for their federal tax bill right now, they are going to go bankrupt.”

s of Dec. 4, Cannabis City owed $631,171, one quarter of the shop’s $2,524,685 in total sales, to the state in the form of excise tax, according to state Liquor Control Board figures. Because of the 280E provision this excise tax expense cannot be written off. The Internal Revenue Service would view the $631,171 as income and tax it accordingly.

“I’m being taxed on the tax I’m paying the state of Washington,” Lathrop said.